economy: fed tapering

Embed Size (px)

Citation preview

  • 8/11/2019 economy: fed tapering

    1/32

    Fed tapering

    Quantitative Easing

    American RBI (US Feds) launched a program to buy toxic assets and governmentsecurities from market.

    Result? Dollar supply increased. (Because central bank is buying stuff from someone and paying them in dollars.)

    You may visualize this as American RBI opened all gates of the dam to send maximumquantity of water (dollars) to American farmers. Although lot of that water- went toChinese and Indian farmers as well!

    QE was carried out in three phases. Finally in Dec 2012, Chairman Ben Bernankeannounced that he ll stop this water -supply when EITHER unemployment rate is 2.5%. Because each condition implies that American farmers are

    booming, hence no need to give them lot of irrigation water (dollars) under Rajiv GandhiSinchaai yojana Quantitative Easing.

    Dec 2013: Finally Chairman Ben Bernanke sees American farms are booming, there is noneed to release lot of water from dam (dollar supply). [in reality unemployment rate

    became lower than 6.5%] So, he starts closing dam-gates one after another. Result? water supply (dollar) reduced.

    This is fed tapering

    Formal definition: Fed tapering is the gradual reduction in the bond buying program of the USFederal Reserves.

    How can Fed Tapering affect India?

    Indianpoint ofview

    DollarSupply DI-FII ExchangeRate Export

    Quant.Easing HIGH ncrease

    Rs. Becomes Strong

    2009: $1=50 rupees. 2010: $1=44 rupees.

    Down due toSubprime +Greece/Eurozone crisis.

    FedTapering

    Medium ecrease

    Rs. Becomes Weak

    March 13: $1=55 May 13(rumor of Fed

    tapering starts) Sep 13: $1=66 Rs.

    Not as high as expected.(more given in later

    paragraphs)

    FIIs takeout their money from India to reinvest in USA (Because Fed tapering impliesthat US economy is recovering. So, American investors may want to re-invest in USA.)

    Sharemarket may go down (may even crash- if there is largescale exit of FIIs)=> desiinvestors money lost.

    Rupee will weaken further. How? FII gone = Rupee weakens While weak rupee = good news for Exporters. But bad news for importers. Weaker rupee = we ve to pay more amount of rupees, to get same amount of crude oil =

    Current Account deficit (CAD) gets Higher. Rupee weakens further.

  • 8/11/2019 economy: fed tapering

    2/32

  • 8/11/2019 economy: fed tapering

    3/32

    Poverty line

    Q. Who decides Poverty line?

    Planning commission

    Q. How does it decide poverty line?

    Monthly per capita Expenditure. Suresh Tendulkar designed its Formula.

    Q. Who provides the data of monthly Expenditure?

    NSSO- National sample survey organization under Ministry of Statistics and Programme Implementation

    Tendulkar s poverty line

    AreaMonthly Expenditure per person

    (Rs.)

    Rural 816

    Urban 1000

    According to Tendulkar formula, poverty has declined, as seen in following graph:

  • 8/11/2019 economy: fed tapering

    4/32

    Mugup the value of Total poors (%wise) & in crores

    No. of Poors in India (TendulkarMethod)

    Tendulkar 2004 2011

    Poor % 37.2 21.9

    Poor Cr. 41 27

    Time for stupid census ranking:

    State wise (Ref. Economic Survey 2013 page 238)

    Highest rural poverty Lowest poverty

    1. tie: Odisha, MP2. Bihar3. Assam

    1. Kerala (7.1%)2. Himachal (8.1%)3. Punjab (8.3)%

    highest rural unemployment highest urban unemployment

    1. Kerala2. Assam3. Bihar4. WB

    .lowest in Gujarat (3/1000)

    1. Bihar2. WB3. Andhra4. Haryana

    .lowest in Gujarat (34/1000)

    Tendu Leopard vs Ranga Khush

    Earlier Committees: Alagh 77, Lakdawala 89

    Committees Tendulkar C.Rangarajan

    Set up by Planning commission Planning commission

    Set up in 2005 2012, May

    Submitted report 2009 2014, July

    Poverty estimationmethod

    Monthly per CAPITAExpenditure.

    Monthly Expenditure of family offive.

    Urban Poverty line

    Urban poverty line (Rs) Tendulkar C.Rangarajan

    per day per person 33 46.90=~47

  • 8/11/2019 economy: fed tapering

    5/32

    per person per month 1000* 1407

    per family of five, per month 5000 7035

    *this is their official recommendation. Rest numbers are derived.

    Rural Poverty lineRural poverty line (Rs) Tendulkar C.Rangarajan

    per day per person 27 32

    per person per month 816* 972

    per family of five, per month 4080 4860*

    *these are the official numbers recommended by them. Remaining figures are derived.

    Why Ranga NAA-KHUSH (unhappy)?

    Q. Why is Ranga unhappy with journalists and politicians? Inform the nation in 200words.

    Villain Ranga (Jogindar) is also unhappy because mainstream Bollywood directors alsoreleasing vulgar movies & item- songs, thereby affecting his SUSTAINABLE Livelihood

    C. Rangarajan has received lot of negative publicity because:o He kept poverty line to be ridiculously low Rs.32 for rural and Rs.47 for Urban.o Therefore He is insensitive towards the poor.

    But Ranga never gave those daily numbers. He had given combined poverty line for a

    family of five members- Rs.7035 (Urban), which is a plausible number. After all, if you

  • 8/11/2019 economy: fed tapering

    6/32

    live in a family of five, then some costs will get reduced per head (e.g. rent, lightbill,LPG etc.)

    Besides, if a family spending >7000 per month = their income would be definitely above7000. So in reality, Ranga has not insulted the poor. Infact, He has tried to cover more

    poor under BPL & Sarkaari schemes. Media has derived those insensitive daily Expenditure figures (Rs.33, Rs.47) by

    dividing the monthly Expenditure of five people, then further dividing that number by 30. If you objectively convert Ranga s poverty line into purchasing power parity (PPP), it s

    $2.44 per person, per day. And that figure even higher than World bank estimate. In otherwords, Ranga included more poor in BPL, than even World bank would!

    Thus, journalists and politicians have misinterpreted the poverty line issue- just like theymisinterpreted Anti-CSAT movement to be against those 8 easy English MCQs aboveDecision Making section!

    How is 100 million poors increased?

    Since Ranga raised poverty line, obviously more people would become below poverty line.

    why does Hindu keep saying 100 million poors added?

    Poverty in India: Year 2011

    Formula # of BPL in crores

    Tendu 27

    Ranga 37

    difference 10 crore = 100 million BPL increased.

    anyways moving on

    Calorie Expenditure

    Tendulkar C.Rangarajan

    only calorific value in Expenditure Calorie +Protein + fat. Explained below

  • 8/11/2019 economy: fed tapering

    7/32

    In the Indian economy books writing during Adam Smith s time, you d have read poverty line =2400 calorie in Rural areas and 2100 calorie in Urban areas. That was Lakdawalla Committee(1989-1993).

    Calorie Lakda Ranga

    Rural 2400 2155

    Urban 2100 2090

    Observe that Ranga reduced the calorie requirement- why?

    Because ICMR study report said so. Besides, over the years use of machinery andvehicles has increased, so today s generation doesn t require that much calorie.Besides, laborers can get extra energy by chewing calorie- free Gutkha.

    Ranga also included Expenditure on protein &fats

    gms / day Rural Urban

    Protein 48 50

    fats 28 26

    Coming back to Original topic:

    Tendulkar C.Rangarajan

    Only counts Expenditure onfood, health, education,clothing.

    food + nonfood items such as education, healthcare, clothing,transport (conveyance), rent. + non-food items that meetnutritional requirements.

    Urban poverty increased on faster rate (40%) than rural poverty (19%)

    This is obvious, because Ranga included non-food itemslike rent, education etc.

    These items/services are more expensive in cities than invillages.

    Ranga recommends that at any given point of time,

    bottom 35% rural junta always be considered poor bottom 25% urban junta always be considered poor.

    Poverty ratios should be disengaged from entitlementsunder Government schemes.

    e.g. cheap foodgrain quota under Food Security Actshould not be based on BPL-ness, but social-caste census.

  • 8/11/2019 economy: fed tapering

    8/32

    Engels law & MPCE Monthly per capita Expenditure: NSSO 68 t Round (2011-

    12)

    area Average MPCE Highest in % food Expenditure

    Urban Rs.2399 Haryana 38.5%

    Rural Rs.1278 Kerala 48.6%

    This indicates rural-urban disparity. Cityfolks have more money to spend than Villagers. Engels law says: when income rises, % of overall income spent on food item decreases. We can see this happening in urban areas. City folks spending ~39% while villagers

    spending ~49% of their income on food. Among states: Kerala spends the least money on

    Centrally sponsored schemes (CSS)In June 2013, UPA-II revamped CSS

    BEFORE AFTER

    137 schemes 66 (list given i n PRSIndia LINK )

    States did not have any freedom to spendmoney on their discretion.

    10% flexifunds

    Some of the schemes directly gave money to NGOs and project implementation agencieslike DRDA.

    Entire money will be transferred to Consolidatedfund of the state Government. From there,everyone will get money

    For every new scheme, states will have to

    contribution some money themselves.explained below:

    The Union: state contribution ratio will be as following

    Area Union States

    Special category states (JK, NE, Himachal & Uttarakhand) 90 10

    other states 75 25

    CSS classification

    As per Economic Survey, we can classify all Sarkaari schemes, into following categories. AndI ve covered the schemes into the same format in my ch13 sum mary subparts.

    1. Poverty removal: we are here (MNREGA, Urban and Rural livelihood missions)2. Health, women and child

    3.

    Education & skill

    http://mla.prsindia.org/sites/default/files/policy_guide/Policy%20Guide%20CSS.pdfhttp://mla.prsindia.org/sites/default/files/policy_guide/Policy%20Guide%20CSS.pdfhttp://mla.prsindia.org/sites/default/files/policy_guide/Policy%20Guide%20CSS.pdfhttp://mla.prsindia.org/sites/default/files/policy_guide/Policy%20Guide%20CSS.pdf
  • 8/11/2019 economy: fed tapering

    9/32

    4. weaker section: welfare, protection5. Social security6. infrastructure: rural & urban

    Poverty removal schemes

    Budget and Economic survey discuss only three schemes under this category

    (1) MNREGA Livelihood missions: (2) Rural (Ajiveeka) (3) Urban

    Let s check em one by one

    Scheme#1: MNREGA Act 2005

    under Rural Development ministry Promises minimum 100 days of unskilled manual work To each rural household. (not to each person) In a financial year (1 st April to 31 st March) 1/3 rd women participation Unemployment allowance, if you can t get work within 15 days State governments have to appoint district level ombudsman to hear complaints Wages: Material ratio = 60:40

    MNREGA Wages are linked with CPI inflation for Agriculturallaborers

    year MNREGA wages (CPI-AL)

    2006 65

    2013 132

    MNREGA performance

    for the year 2013, Average work days 46; women participation 52.9%

    Time for another stupid ranking

    BEST Worst

    WorkdaysTamilnadu Assam

    KERALA Punjab

    women participationKERALA UP

    Andhra Assam

    MNREGA Reforms already taken

    1. Individual bank/PO accounts for All women

  • 8/11/2019 economy: fed tapering

    10/32

  • 8/11/2019 economy: fed tapering

    11/32

    Scheme #3: National Urban Livelihood mission

    1. Who ? Ministry of Housing & Urban poverty alleviation.2. Earlier called Swarnajayanti Sahari Swarojgar Yojana. Then renamed into National urban

    livelihoods mission, with following features

    1. self-help groups: bank credit + subsidies + skill training2. street vendors also get easy loans and skill training3. Shelters for the homeless.

    WTO: Structure and functions

    Q. Write a note on origin, structure and functions of WTO? 200 words 1944: Bretton Woods summit leads to birth of three institutions

    Institution KEY IDEAWorld

    bank Cheap loans for development projects in third world

    IMF Balance of payment and Exchange rates

    GATT

    To reduce barriers to international trade. Bretton Woods wanted to setup an international trade organization (ITO) but

    USA did not ratify. Thus, GATT was born as a stopgap arrangement. General Agreement on Tariffs and Trade. GATT s Uruguay round of talks => Marrakesh Treaty 94=> World trade

    organization (WTO) born in 1995, India founding member.

    WTO structure

    MinisterialConference

    Supreme Decision Making body 160 members, Latest member Yemen (Capital: Sanaa) Meets once every two years, deliberates on trade agreements Appoints Director general

    GeneralCouncil

    day to day Decision Making body Meets regularly at Geneva. implements decision of ministerial conferences Has Representative from each member state.

    http://www.wto.org/english/news_e/news14_e/acc_yem_27may14_e.htmhttp://www.wto.org/english/news_e/news14_e/acc_yem_27may14_e.htmhttp://www.wto.org/english/news_e/news14_e/acc_yem_27may14_e.htmhttp://www.wto.org/english/news_e/news14_e/acc_yem_27may14_e.htm
  • 8/11/2019 economy: fed tapering

    12/32

    has two bodies, with separate chairmen

    1. Dispute settlement body2. Trade policy review body

    Below general council, there are Committees on individualagreements and annexes- Anti dumping, Subsidies &countervailing measures (SCM) etc.

    DirectorGeneral

    Roberto Azevdo Appointed by ministerial conference Has four years term. heads the Secretariat at Geneva

    WTO Functions

    1. Ensure the developing countries benefit from world trade, especially the least Developedcountries.

    2. Reduce barriers to international trade both tariff barriers and non-tariff barriers.3. Get the members Enter into multilateral trade agreements to achieve above objectives.4. Provide forum for negotiation and dispute settlement for the members, if the agreements

    are violated.5. Cooperate with UN, World and IMF for a global economic policy that improves

    livelihood, protects environment and promotes sustainable Development.

    Tariff and Non-Tariff Barriers to Trade

    All countries want to protect domestic industries and prevent entry of foreign players. So, theycreate two types of barriers to International trade:

    TariffBarrier

    If US President Obama imposes 56% custom duty on Indian Cars.

    Non-TariffBarrier

    If Obama tries to restrict entry of Indian cars without imposing heavy taxes onIndian cars, for example

    1. Subsidies : Giving free electricity to Detroit car manufacturers. OR IfAmerican residents buy American made cars, Obama administration will pay50% of your vehicle insurance premium, and so on.

    2. Public Procurement: Making rule that only American companies can filluptender for new sarkaari cars.

    3. Other obstacles like not giving custom clearance quickly. Putting quota oneach exporter country and so on.

    World Trade organization (WTO) aims to reduce such tariff and non-tariff barriers tointernational trade.

    But what if China starts manufacturing cheap cars with poor breaks, bad steering andcarcinogenic paint. Can Obama ban such dangerous foreign products? Does WTO permitthat?

    Yes, WTO made two special agreements for safety:

    Non-food products Technical Barriers to Trade Agreement (TBT)

  • 8/11/2019 economy: fed tapering

    13/32

    Food Products Sanitary and Phytosanitary Measures Agreement (SPS) EU had banned Indian Alphonso under this provision.

    WTO agreements

  • 8/11/2019 economy: fed tapering

    14/32

  • 8/11/2019 economy: fed tapering

    15/32

  • 8/11/2019 economy: fed tapering

    16/32

    4. Bovine meat

    ~204 words

    WTO has many other agreements but hard to memorize and fit into a 200 word answer anyways.

    For exams in 2014- 17, the important agreement is AoA. (Because it ll stay in news due to 10%food subsidy issue)

    Agreement on Agriculture (AoA)

    WTO s Agreement on agriculture (AoA) has three pillars Pillar What they want from member states?

    1.Market access reduce import duties2.export competition reduce export subsidies3.domestic support reduce Amber box subsides

  • 8/11/2019 economy: fed tapering

    17/32

    AoA classifies subsidies into two parts:

    DOMESTIC SUBSIDY EXPORT SUBSIDIESmostly by third world to keep helpfarmers and keep vote bank happy

    mostly by first world, to keep their MNC-corporatizedfarmer lobby happy.

    to increase food production, foodsecurity

    to capture Foreign market by flooding their cheaper productsIndia doesn t give much export subsidies to farmers -except a select horticulture and floriculture Items

    AoA further classifies them into 3 parts

    1. GREEN2. BLUE3. AMBER (WTO wants to reduce

    these subsidies)

    AoA wants members to reduce export subsides

    developed countries: cut by 36% Developing: by 24% Least developed: not applicable.

    Green blue and Amber subsidies

    Just like traffic signal has three colors: green (GO), orange (caution) and red (STOP). Similarly, WTO classifies DOMESTIC AGRICULTURE subsides into three categories:green (GO), blue and amber (reduce).

    There is no RED box meaning WTO doesn t wish to completely STOP subsides, because it is impractical anyways!

    Box subsidies

    GREEN

    Subsidies that don t disrupt trade balance OR Only cause minimum damage to trade balance. E.g. agriculture research-development, extension services, farmer training

    programs, pest-disease control program, flood/drought relief money paid to

    farmers etc. WTO Limit: nothing. Governments can give as much as they want.

    BLUE

    Amber type Subsidies that aim to limit production. Subsidies that don t increase with production. For example subsidies linked with

    acreage or number of animals. Very few countries use blue box- Iceland, Norway, Slovenia etc. WTO limit: Nothing.

    AMBER

    Subsidies that disturb trade balance like, subsidies on fertilizers, seeds, powerand irrigation.

    They distort trade balance because they encourage excessive production,therefore given country s product becomes cheaper than others, inthe international market.

    WTO limits: yes- explained below

    Amber box: De Minimus limits

    Q. Explain De-M ini mus limits in WTOs agreement on agriculture. Why is India opposed toi t? (200 words)

  • 8/11/2019 economy: fed tapering

    18/32

    Under WTO s agreement on agriculture (AoA), domestic -subsidies are classified intothree groups: Green, Blue and Amber.

    Amber box subsidies create trade distortion because they encourage excessive productione.g. fertilizers, seeds, electricity and irrigation subsidies.

    Therefore, WTO wants to limit the amber box subsidies. De Minimus is the Minimal amounts of Amber box subsides permitted by WTO, even

    though they distort trade. De minimus limits are calculated on the agriculture production of the given member state

    in 1986-88.

    Country De-Minimus: Amber box subsides quotaDeveloped 5% of agriculture production in 1986-88Developing 10%Least developed Exempted.**

    ** Besides if they re L.D.C=> they ve no AUKAAT to give truckload of subsidies anyways.

    Why is India opposed?

    India fears it ll have to cut down its food subsidy to comply with WTO s De -minimus level

    1. In 1986: USA agriculture production was far ahead of India. So, their 5% De-minimusquota will be far bigger than our 10% quota (in absolute figures).

    2. Input costs have skyrocketed in these decades. But, De- minimus doesn t considerinflation factor.

    3. So, if India has to limit its (Amber box) agro. subsides to a non-i nflation adjusted 86 s production, we cannot continue the MSP to farmers or food security to poors.

  • 8/11/2019 economy: fed tapering

    19/32

    4. These subsidized foodgrains are meant for feeding the poors only, they do not distortinternational trade.

    ~190 words

    India s subsidy Expenditure in Crores (Rs.)Subsidy component RE-2013 BE-2014

    Food 92000 115000

    Petroleum 85480 63427Fertilizer 67971 72970

    Ranking 2013: Food > Petroleum > Fertilizer

    Ranking 2014: Food > Fertilizer > Petroleum

    What is Bali summit and Peace clause?

    Q. What is hell is Bali Package and Peace clause? (200 words)

    December 2013: 9th WTO ministerial conference held at Bali, Indonesia Bali Package is the collection of three prime outcomes of this summit.

    Trade facilitationagreement

    To cut down the red tape in customs clearance

    LDC exports Exporters from Least developing countries, will get Duty free, quota

    free (DFQF) access to markets in foreign countries.

    food stockholding this lead to peace clause, explained below

    as per the original Agreement on agriculture (AoA), the developed and developingcountries have to keep their Amber box subsidies within De-minimus level i.e. 5% and10% of their agriculture production in 1986-88 respectively.

    India opposed this base year and limits, because it d make impossible to imple ment thefood security programs for the poor and MSP for the farmers.

    Therefore, as a measure of temporary relief, Bali summit enacted a peace clause for theAoA

    Salient features of Peace Clause

    No member, can drag any developing country to Dispute settlement mechanism of WTO. for violation of De-minimus limits in AoA Provided that the said developing country

    1. is paying subsidies for staple foodcropso for public stockholding programo For food security purpose.

    2. is providing annual information of its food security Program to WTO.3. Permanent solution will be taken no later than 11 th ministerial conference i.e. at

    December 2017.

  • 8/11/2019 economy: fed tapering

    20/32

    ~215 words.

    What is Trade Facilitation Agreement?

    Manniram is happy knowing that Modi has refused to sign TFA!

    Q. Wr ite a note on th e sali ent features of Tr ade facil itati on agreement (200 words)

    ORIGIN 9 t WTO ministerial conference held at Bali, Indonesia in 2013AIM reduce red tapes and bureaucratic hassles in customs clearance

    Under TFA, Every member:

    1. Will have to publish a detailed list of procedure for import-export, fees, inspection rules, penalties etc.

    2. Minimize the proof documents and clearance required for customs clearance.3. Make all the information available on INTERNET to foreign traders, governments and

    interested parties4. Provide electronic payment of fees, duties, taxes.5. Setup a single window mechanism to help trader submits all documents at a single point-

    preferably online.6. Trader should be notified immediately, If goods are detained at customs.7. Provide faster customs clearance to perishable goods (Fruits, veggies, flowers).8. Member must not ask foreign traders to compulsorily route their applications/fees via

    local customs brokers/middlemen.9. Give Advance ruling, as and where applicable. (Recall advance ruling provision on taxes,

    under Budget-2014 .)

    Least developed countries

    They ll get financial and technical help to comply with above rules.

    New Bodies under TFALEVEL body to implement Trade facilitation agreement

    NATIONAL

    Every nation will have to setup a Committee on Trade Facilitation. it ll implement this agreement and coordination with the

    international body

    INTERNATIONAL WTO will setup a Committee on Trade Facilitation

    http://mrunal.org/2014/07/budget-advance-pricing-agreement-arms-length-vodafone-transfer-pricing-dtc-gaar-advance-tax-ruling-explained.html#684http://mrunal.org/2014/07/budget-advance-pricing-agreement-arms-length-vodafone-transfer-pricing-dtc-gaar-advance-tax-ruling-explained.html#684http://mrunal.org/2014/07/budget-advance-pricing-agreement-arms-length-vodafone-transfer-pricing-dtc-gaar-advance-tax-ruling-explained.html#684http://mrunal.org/2014/07/budget-advance-pricing-agreement-arms-length-vodafone-transfer-pricing-dtc-gaar-advance-tax-ruling-explained.html#684http://mrunal.org/2014/07/budget-advance-pricing-agreement-arms-length-vodafone-transfer-pricing-dtc-gaar-advance-tax-ruling-explained.html#684http://mrunal.org/2014/07/budget-advance-pricing-agreement-arms-length-vodafone-transfer-pricing-dtc-gaar-advance-tax-ruling-explained.html#684
  • 8/11/2019 economy: fed tapering

    21/32

    all members can participate It ll will provide dispute settlement for violation of any provisions

    under this agreement. will elect its separate chairman Will meet at least once every year, review agreement every four

    years.

    Benefits of TFA:

    A simplified customs clearance mechanism will boost international trade, and thereby it will

    will increase in global GDP $1 trillion (~Rs 60 lakh crore)will create more jobs 21 million

    Deadlines under TFAdeadline to sign TFA 2014, July, 31 stBut India refused.

    Agreement becomes effective from 2015

    ~280 words. But in exam, all points can t recalled so it ll automatically FIT the 200 wordslimit!

    Why Modi opposed Trade Facilitation Agreement

    Q. Why has India refused to sign Trade Facilitation agreement? (200 words)

    WTO s Trade Facilitation agreement (TFA) aims reduce the redtape and bureaucratichassles in customs clearance and thereby facilitate international trade.

    But, TFA maintains that it doesn t diminish the rights and obligations of membersunder other agreements of WTO.

    For example, under the Agreement on Agriculture (AoA) if a developing country isgiving Amber box subsidies beyond 10% of its national agriculture production (base year1986), THEN other members will be justified in putting trade sanction or WTO-complaint against the said country.

    2013: In Bali Summit, th e then UPA Government agreed to sign TFA, after WTO Peaceclause, which gave temporary exemption to developing countries from 10% de -minimus

    provision until 2017. 2014: Change of regime,

    Modi Government has refused to sign TFA before deadline (31 st July 2014), because:

    1. Once India has signed TFA, the developed countries may stonewall her demands for arational change in base year and ceiling limits on agro. Subsidies.

    2. Then India will have to cut down agro. Subsidies in MSP and food security programs,else they ll put sanctions on us, soon as Peace -clause temporary deadline is over in2017!

    3. And yet, we ll have to keep giving them easy customs clearance because we signed theTFA!

  • 8/11/2019 economy: fed tapering

    22/32

    Therefore, Government has decided to use TFA signature as a Bargaining Chip for a permanent solution of food subsidies issue.

    What is corporate governance

    Many definitions, you need to memorize at least one- for the GS4.

    Corporate governance is a way of directing the company

    1. To protect stakeholders interest. Observe the word stakeholder not Shareholders.Meaning, company should look after its customers, raw material suppliers, wholesales,dealers, employees, shareholdersall for them

    2. To comply with legal-regulatory requirements. Not just from technical / audit point ofview but from ethical point of view as well- for example misleading ads, harmful

    products, environmentally unsustainable production methods etc.3. Absence of corporate governance leads to fraud, mismanagement, embezzlement and

    harm to society and environment.

    To recent initiatives to enforce corporate governance

    Companies Act SEBI norms

    original act made in 1956 2012: Adi Godrej

    Committee

    new act passed in August 2013 2014, April: SEBI

    published

    Has total 470 sections, Government began phase wisenotification from Feb 2014.

    I m not going into the technical parts related tomerger, acquisition, takeover etc. but just focusing onareas having connection with ethics, corporategovernance, CSR & allied topics.

    will be effective from 1October 2014 (i.e. one day

    before Gandhi s B day)

  • 8/11/2019 economy: fed tapering

    23/32

    Type of companies

    Have to register with Ministry of Corporate Affairs

    Companies Act 1956 Companies act 2013

    no such thing

    One Person Company. minimum capital one lakh rupees But has to convert to public or private limited company IF

    turnover >2cr or capital >50 lakhs.

    private limited: 2 to 50members

    2 to 200 members.minimum capital Rs.one lakh

    public limited: same in both acts

    7 to unlimited membersminimum capital Rs.FIVE lakhs within that,two subgroups

    Listed company- if shares listed on any Indian stock exchange e.g. Infosys, TCS etc. Unlisted company: self- explanatory. e.g. Nokia India, Sahara s those two Housing

    finance companies*.

    * which were selling OFCDs & got Subrato in Jail, for he did not get SEBI permission beforeselling OFCDs and did not repay investors money when SEBI ordered him to.

    overall, 9 lakh companies in India >90% of Indian companies are private limited.

    Holding, Subsidiary and Associate companies

    Holding company = itself owns 20% or more shares of another company .

  • 8/11/2019 economy: fed tapering

    24/32

    that Another company is further classified into:

    subsidiary company associate company

    If 50% shares owned by holding company. If 20% or more shares owned by holding company.

    Board of Directors

    Companies Act 2013: Salient features for corporate governance

    democratic country voters => parliament =>executive

    companies Shareholders (AGM) =>board of directors => CEO, executives.

    Board of directors consists of

    1. Chairman2. executive directors / full time directors3. nominated directors (By banks or central Government- e.g. during mega scam like

    Satyam)4. Independent directors: to protect the interests of minority shareholders.

    Now let s check provisions of Companies act 2013 for directors

  • 8/11/2019 economy: fed tapering

    25/32

    Minimum directors in each company

    One person company 1

    private ltd. 2

    public ltd. 3

    Maximum 15 directors Can add even more directors by resolution in AGM (Annual general meeting of

    shareholders). One person can serve as director in maximum 20 companies One director must be Indian resident (i.e. staying in India for 182 days or more) One director Woman in the board. (SEBI norms says the same)

    If director remains absent for 12 months- consider his position vacant, and get new guy.Means Sachin and Rekha will have to think twice before becoming directors in anycompany.

    Anyways, these are provisions for directors, in general. Now let s check specific provisions forIndependent directors

    Independent directors (ID)

    Job of Independent director = protect the interests of shareholders, particularly the minorityshareholders. He has to fulfill following criteria:

    1. He is not a Promoter of the company, NOT nominated by the Chairman2. He has no pecuniary interest in the company, except salary as director. (meaning

    com pany s wholesaler, retailer etc. cannot become independent directors) 3. He is not an employee of the company

    Companies Act 2013- ID requirements

    1/3 rd directors in public ltd. company must be Independent directors. (so, if companytakes 15 directors, 5 must be ID)

    They ll have 2 terms of five years each = total 10 years But their performance will be reviewed in shareholders Annual General Meeting

    (AGM). Means again Sachin and Rekha will have to think twice before becomingIndependent directors of any company.

    After 10 years service, if they want to join same company as ID again, they ll have towait for 3 years cooling period.

    SEBI norms: Independent directors

    Let s pause from companies act for a while. We know that

    Companies Act SEBI norms

    new act passed in August 2013 2014, April: SEBI published will be effective from 1 st October 2014

  • 8/11/2019 economy: fed tapering

    26/32

  • 8/11/2019 economy: fed tapering

    27/32

    Quorum depends on number of shareholders.

    Data not important except for MBA interviews

    Members quorum

    private ltd company 2 members

    public ltd company upto 1000 shareholders 5 members

    public ltd >1000 upto 5000 15 members

    public ltd. >5000 shareholders 30 members

    Audit related provisions

    Audit Committee

    Have to make an audit Committee from board of directors. Its chairman must be an independent director. Provision for internal audit by CA, Accountants, even other (non-CA) persons. ICAI is

    opposing this. Companies will have to setup whistleblower mechanism.

    External Auditors terms and responsibility

    One auditor can audit maximum of 20 companies. If he finds any fraud- he must report to both Union Government (ministry of corporate

    affairs) and during the AGM.

    Auditor cannot audit the same companyforever

    individual auditor 5 years

    audit firm 2 terms x 5 years = 10 years

    After that cooling off period of 5 years.

    Why? Well, same reason why Government officials should be transferred after 3-5 years so theydon t develop nexus with local thugs.

    Company Secretary

    Company Secretary acts as a link between board of directors and shareholders. He arranges BoD meetings, AGM, ensure quorum, minutes of the meeting etc. Companies above certain share capital, have to compulsorily hire company Secretary.

    Companies Act 1956Companies act

    2013

  • 8/11/2019 economy: fed tapering

    28/32

  • 8/11/2019 economy: fed tapering

    29/32

  • 8/11/2019 economy: fed tapering

    30/32

    2% Corporate Social responsibility (CSR)

    Under the new act, Companies will have to spend 2% of t heir last three years average profit onCSR activities. (e.g. schools, slum redevelopment, chowkidari to prevent junta fromurinating/defecating around railway station etc.)

    2% CSR rule applies to only followingcompanies

    Net profit 5 crore (before tax)

    Net worth 500 crore

    turnover 1000 core

    2% rule doesn t apply to income earned from foreign branches of the above companies. Above companies have to setup CSR Committee made up of 3 board of directors. Committee will formulate & monitor CSR policy.

    SEBIs corporate governance norms

    2012: Adi Godrej Committee 2014, Feb: SEBI notified the norms 2014, 1 st October: these rules will become effective. They run parallel to what is already given under companies act. Following diagram summarizes it- just write two lines on each of them and you re done

    with 100-200 words question in mains.

    http://mrunal.org/2014/08/economic-survey-ch11-railway-budget-infrastructure-tariff-authority-biodiesel-biotoilets-fdi.html#492http://mrunal.org/2014/08/economic-survey-ch11-railway-budget-infrastructure-tariff-authority-biodiesel-biotoilets-fdi.html#492http://mrunal.org/2014/08/economic-survey-ch11-railway-budget-infrastructure-tariff-authority-biodiesel-biotoilets-fdi.html#492http://mrunal.org/2014/08/economic-survey-ch11-railway-budget-infrastructure-tariff-authority-biodiesel-biotoilets-fdi.html#492http://mrunal.org/2014/08/economic-survey-ch11-railway-budget-infrastructure-tariff-authority-biodiesel-biotoilets-fdi.html#492
  • 8/11/2019 economy: fed tapering

    31/32

    Appendix: Related party transactions (RPT)

    Lengthy topic, not important for prelims. But will be important for (MBA) interviews becausethis Maruti-Suzuki controversy will drag on for long.

    Maruti Suzuki India ltd

    majority shareholder Suzuki Japan

    minority shareholder HDFC, Reliance Capital, ICICI, SBI etc.

    2012: Strike in Manesar plant, Haryana. Manager died, more than 3000 crore lost due tohalt in production.

    After this, Suzuki (Japan) registered a separate company Suzuki Motors, Gujarat tosetup separate factory in Mehsana, Gujarat.

    Suzuki itself will manufacture the cars in this Gujarat plant, will hand It over to MarutiSuzuki for selling through its showrooms.

    before after

    Maruti Suzuki manufacturedcars, sold them = profit tothemselves.

    Then they distributeddividend to Suzuki and othershareholders.

    Suzuki will keep profit on car manufacture. Maruti (India) will end up like a car -distributor

    company=> less profit for Indian company => lessdividend to its minority shareholders.

    So in this case, we ve two p arties

    Holding Company Suzuki (Japan) that owns ~56% in Maruti Suzuki India ltd.(Subsidiarycompany).

  • 8/11/2019 economy: fed tapering

    32/32

    Now one party (Japan) is taking an action (of setting plant in Gujarat), which will have negativeramification for the investors in other party (Indian Maruti).

    This is one type of related party transaction.

    As per companies Act 2013, Related party transactions require voting-approval from majorityOF the minority shareholders.Therefore, Suzuki has decided following:

    First they ll do roadshows and seminars for awareness generation among shareholders(about the benefits of Gujarat plant)

    (Rumors) They have even hired investment bankers to influence the FIIs who own sharesin Maruti Suzuki India.

    Voting will be done probably in September 2014 s A GM At that time, Suzuki can t vote (because majority shareholder) but IF from the remaining

    shareholders, if 3/4 th vote in favor, then Suzuki can proceed in setting up Gujarat plant.